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Key provinces join Ottawa on ABCP plan

The 16-month-long nightmare in Canada&#39;s asset-backed commercial paper market appears finally to be at an end, thanks to a multibillion-dollar taxpayer guarantee.

By Gary NorrisTHE CANADIAN PRESS

Fri., Dec. 19, 2008

The 16-month-long nightmare in Canada's asset-backed commercial paper market appears finally to be at an end, thanks to a multibillion-dollar taxpayer guarantee.

The federal government and the governments of Ontario, Quebec and Alberta have agreed to "partner" in supporting a restructuring of $32 billion worth of ABCP not issued by Canada's big banks.

Federal Finance Minister Jim Flaherty said in a morning announcement that Ontario and Quebec had agreed to help and discussions with Alberta were ongoing. An Alberta Finance Ministry spokesman said a few hours later that the province "has decided to do its part to support this agreement."

The governments did not specify the size of the "senior funding facility" they will provide to backstop what has become known as the Montreal accord.

But Flaherty said the deal will enable investors and commercial-paper issuers to "achieve a stable and effective restructuring agreement" which "will protect financial stability and the health of Canada's financial markets."

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A Finance Department spokesman said the size of the public support and other details will be made public "later."

The government had been approached for a guarantee of $9.5 billion.

"Unless someone does something totally irrational, there should be a deal," Colin Kilgour, an independent consultant to holders of the frozen paper, said after Flaherty's announcement.

He added that the taxpayer commitment is probably close to the $9.5 billion proposed by a blue-ribbon committee toiling to untangle the mess.

The Ontario, Quebec and Alberta governments are involved because much of the crippled ABCP is held by their institutions, notably the Caisse de depot et placement du Quebec pension plan.

The market for non-bank ABCP – short-term notes based on packages of debt, which normally roll over uneventfully as they mature – ran aground in August 2007 as investors panicked at the idea that they might contain American subprime mortgages and other risky assets.

The so-called Pan Canadian investors committee led by Bay Street lawyer Purdy Crawford has been trying ever since to work out an arrangement under which the short-term notes are to be exchanged for longer-term debt reflecting the maturities of the underlying assets.

News of the taxpayer aid sent shares in National Bank of Canada (TSX: NA), the Canadian bank most exposed to the ABCP debacle – up 10 per cent Friday morning, after a series of steep declines.

The announcement came a day after the court overseeing the restructuring of the notes extended the process until Jan. 16.

But foreign banks involved in the matter were reported to have indicated they wanted a resolution by Monday or they would pull the plug on standstill arrangements, likely triggering massive losses for themselves and everyone else involved.

Under the taxpayer-supported accord, those banks will renegotiate existing deals to make it less likely the government money will be needed, as they would be drawn on first if the underlying note assets continue deteriorating.

"They will lose money before the government loses money," said Kilgour, who works for corporate ABCP investors that are not part of the Crawford committee.

On the positive side for the foreign banks, they will be able to close their books on the festering ABCP issue, and benefit from a key but controversial element of the Crawford plan, protecting ABCP issuers and dealers from litigation.

"They get a full, complete legal release that says no one can ever come after them on this ever again," Kilgour observed.

Most of the notes are held by institutions such as pensions and businesses, but $371 million went to 2,542 retail accounts.

Most small investors with less than $1 million in ABCP are to be compensated in separate deals with their brokers – but only after the main restructuring is complete.

Aside from the hardship for individuals, the ABCP tangle hit corporations which had invested spare cash in what they assumed were secure and liquid short-term notes, then found themselves unable to access money needed for capital projects or ongoing operations.

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